The stress in the banking sector may require banks to add up to Rs 1 lakh crore ($15.7 billion) of capital over and above the Basel III requirement to manage the risks from their loan exposure to debt-laden companies, according to Indian Ratings and Research.
Of that, public sector banks, who dominate India's banking sector with more than 70 per cent market share, will need Rs 93,000 crore to deal with stressed loans, the agency said in a report.
That may "significantly increase" the Government's equity injection requirements in the state-owned banks, as against Rs 70,000 crore already announced.
"We expect private sector banks and large state-run banks to be better placed in handling potential credit cost hikes from these large stressed corporates, given their sufficient operating and capital buffers," it said.
The agency analysed 30 large and most-exposed companies, each with individual debt of over Rs 5,000 crore aggregating to 7-8 per cent of the overall bank credit.
It pointed out that most of these companies’ debt-to-equity level has increased to 4-6 times in FY15 from about 2 times in FY10. “This reduces their repayment capacity or the debt servicing levels…Banks will need a 24 per cent reduction in their current exposure to ensure reasonable debt servicing (1.5 times) by these corporates on a sustained basis,” said Ananda Bhoumik, Senior Director – Financial Institutions at Indian Ratings.
In addition, the market capitalisation to debt ratio has also dropped significantly to 5-7 per cent from 35-50 per cent.
He added that mid-sized state-run lenders will be the most affected, with their thin margins and weak capitalisation.
Most state-run lenders have high levels of bad loans and their shares are trading below their book values, limiting their ability to attract capital from the market and rely on the traditional capital infusion by the Government.